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Friday Jan 27, 2012

Property values 'still 25% too high'

House prices in South Africa were still at least 25 percent overvalued despite the economy being three years into "the great recession", property economist Erwin Rode said yesterday.

The implication of this was that a downward adjustment in real house prices was inevitable and only the timing and speed of the decline was in question, he said.

"Prices are so high in real terms that you must expect the bubble to burst some time," Rode added.

However, he did not believe there would be a catastrophic market crash but a gradual decline in real house prices.

Rode's estimate of the overvaluation in house prices is based on the price level suggested by the trend line over the past 44 years.

He said a decline in real house prices did not necessarily mean nominal house prices would decline.

It was more likely that nominal house prices would grow by about 2 percent a year for a few years, while inflation was at about 6 percent, so prices would be falling in real terms.

"It will take many years for the market to get back to more realistic price levels - five years or maybe more depending on the speed of the price decline in real terms," he said.

Jacques du Toit, a senior property analyst at Absa, said its forecast was that house prices would decline further in real terms this year and possibly next year with slight growth returning in 2014.

Du Toit said Absa's expectation was that nominal house price growth would be low this year and next year and that inflation would be above 6 percent, resulting in real house price deflation.

He stressed that the performance of the house market depended on market activity, transaction volumes and supply and demand.

Absa based its residential property market forecasts on the macroeconomy and factors such as economic growth, employment, income growth, household debt levels, interest rates and inflation all played a role in its forecast.

John Loos, a household and property sector strategist at First National Bank (FNB), said he did not subscribe to the view that house prices were 25 percent overvalued and did not believe it was possible to estimate how much the market was overvalued.

Loos expects real house prices to decline further because the average time houses remained on the market was long, demand was low and slower economic growth was expected.

An FNB report released this week based on the perceptions of estate agents revealed that the affordable housing market was the best-performing segment last year with average prices growing by 6.5 percent to R375 460.

The lower-income value band, with an average price of R726 943, achieved 4.6 percent price growth; middle income areas averaging R1.1 million grew 4.8 percent; upper end metro suburbs averaging R1.87m grew 5 percent; and luxury areas averaging R2.89m fell 7.6 percent.

Rode is also not optimistic about the performance of the retail property market because it is oversupplied and consumers were "up to their eyeballs in debt".

He said real office rentals were contracting because of the business cycle and not because they were overpriced and the longer-term prospects were better for the office and industrial markets than the residential and retail property markets.

Business Report

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